Question

Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Indexed Security and the yield on a nonindexed Treasury security provides insight into:___________

a. the nominal interest rate.
b. the real interest rate.
c. the nominal exchange rate.
d. the expected inflation rate.

Answer 1

The correct option is d, the expected inflation rate.

If the coupon rate and the maturity length is kept absolutely constant, there is a difference which can be noted in the yield on a Treasury Inflation-Protected Security and the yield provided by a non-indexed Treasury security. This difference in yields provides useful insights to the expected inflation rate. Hence, it is the correct option.